Positive Tone In HEL

Congruent to the sector's recent boom in issuance, bid for home-equity collateral has improved over the last month or so, with deals pricing inline and tight of guidance, market sources said.

According to Thomson Financial Securities Data, in August and through Sep. 20, there was approximately $13 billion in home equity issuance, not including deals like Royal Bank of Scotland's $700 million Arran Two, or a $322 million deal from GMAC, both of which priced late last week. Further, at press time there were several deals in the pipeline set to close before month's end.

Also according to TFSD, average coupon for home equitys across all classes, payment types and maturities moved in to 7.85% for August and September, from 8.15% in June and July.

As a precursor to improved ABS market conditions, whole loan pricing for home-equity pools has increased as much as 50 basis points to 75 basis points over the last two-to-three months, and as much as 1% year-to-year, said analyst and traders.

The positive tone in the home-equity sector reflects a number of market factors, particularly industry consolidation. Year-to-date (Jan. 1 - Sep. 20), there has been approximately $50 billion in home-equity issuance, compared to $54 billion for the same time period in 1999.

"It's partially a matter of the re-organization that has been going on for a long time now," said Tom Zimmerman, senior vice president and head of ABS research at PaineWebber. "Money Store hasn't been orginating for while now, and there's a lot of others who have sort of dropped out of the picture."

Conditions have changed dramatically for home-equity loan originators over the past two years, Zimmerman explained. For example, banking entities, such as Advanta Corp., are required by regulators to increase capital risk weighting against securitized and retained assets.

Further, the market has changed: exit frenzied pricing/bidding. In 1997 and the start of 1998, whole loans were sold as high as 105%, because issuers paying those prices - typically specialty finance companies - were able to securitize the loans into the capital markets for a profit.

When the crisis hit in 1998, and the ABS market for home-equity dried up, prices for whole loans dropped into the 102-level, which made origination of the loans far less profitable.

The current bid is somewhere in the 103-range, a source in trading said.

"Now the market is definitely experiencing a rationalization, and pricing is moving back up to a manageable level," said Rod Dubitsky, analyst at Credit Suisse First Boston.

"It's definitely a positive thing that people are getting better prices on their products, as long as it's being done in a controlled, disciplined way, and people have transparency on the performance," Dubitsky said.

Also notable lately is that investment banks have become a major buying force in the whole loan market, and subsequently, major issuers off their own shelves

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